Bitcoin in freefall as ‘sharks’ circle

Bitcoin’s plunge extended to more than 25% on Friday as the frenzy surrounding digital currencies faced one of its biggest tests yet.

The world’s largest cryptocurrency approached US$10 000 as this week’s selloff entered a fourth day with increasing momentum. It touched a record high $19 511 on Monday. Other cryptocurrencies also tumbled, with bitcoin cash crashing more than 35% and ethereum losing more than 23% over the past 24 hours, according to coinmarketcap.com.

The losses represent a major test for the cryptocurrency industry and the blockchain technology that underpins it, which have rapidly entered the mainstream in recent weeks. Bears cast doubt on the value of the virtual assets, with UBS Group this week calling bitcoin the “biggest speculative bubble in history”. Bulls argue the technology is a game changer for the world of investment and finance. Both will be closely watching the outcome of the current selloff.

The sharks are beginning to circle here, and the futures markets may give them a venue to strike

“The sharks are beginning to circle here, and the futures markets may give them a venue to strike,” said Ross Norman, CEO of London-based bullion dealer Sharps Pixley, which offers gold in exchange for bitcoin. “Bitcoin’s been heavily driven by retail investors, but there’ll be some aggressive funds looking for the right opportunity to hammer this thing lower.”

Traders who bought the currency on futures exchanges using collateral may start facing margin calls following the price decline. Two venues launched products in recent weeks that required hefty security, with Cboe needing 44% to clear contracts, and the CME 47%. Brokers set safety nets even higher.

“There’s no doubt people who got in on margin will face some pressure here,” Norman said by phone from London. “The volumes weren’t huge, so it won’t be a major price driver, but for those caught on the wrong side it will hurt.”

Mania phase

Many of the recent news stories and market moves connected to cryptocurrencies appear to carry hallmarks of the mania phase of a bubble. Long Island Iced Tea shares rose as much as 289% after the unprofitable Hicksville, New York-based company rebranded itself Long Blockchain. Bank of Japan governor Haruhiko Kuroda said on Thursday that bitcoin isn’t functioning like a normal means of payment and is being used for speculation.

Still, cryptocurrencies are attracting established players. Goldman Sachs Group is setting up a trading desk to make markets in digital currencies such as bitcoin, according to people with knowledge of the strategy. The bank aims to get the business running by the end of June, if not earlier, two of the people said. — Reported by Samuel Potter and Eddie van der Walt, with assistance from Richard Frost, (c) 2017 Bloomberg LP